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Bomb Cyclone Ravages U.S. Coast: 3 Utilities in Focus

Zacks Equity Research

Even though the northern part of the United States usually experiences extreme climatic conditions during winter, this year has been especially harsh owing to a snowy nor'easter "bomb cyclone." The cyclone hit the coasts of Florida and Southeast United States on Jan 3, and South Carolina, North Carolina, Virginia, Delaware and New Jersey the next day.

The bitter cold wave enveloped the entire East Coast as well as the MidWest of the United States, causing heavy snowfall in the East Coast from Maine to North Carolina (as per Reuters), resulting in wide-spread power cuts. Extensive outages were reported in these regions, which might have led the broader Utility sector’s performance to dip. Evidently, the Utility sector dropped 1.4% since the beginning of 2018.

Impact on the Economy

Bomb cyclone spurred heating oil and natural gas demand in turn raising their price. Per The New York Times report, the cost of residential heating oil at the end of December 2017 surged 13% to $2.92 a gallon, compared with the same period in 2016.

Being the major residential and commercial heating fuel in the Northeast and most widely used by power plants, U.S. natural gas demand also remained near record highs last week. Consequently, U.S. spot natural gas and power prices on Jan 4 rose to their highest in years in several regions (as per Reuters).

The catastrophic back-to-back hurricanes and wildfires in 2017 in the United States have already led to a damage of $306 billion. The extreme winter storm and the cold waves, expected to continue for a while per the National Weather service, along with other catastrophes that usually take place each year, are likely to result in similar if not more damage.

Impact on Utilities

The severe storm followed by heavy snowfall and high winds initially caused electricity outages in almost 80,000 homes and businesses on the U.S. Atlantic coast. Power outages have also hit thousands of customers in Florida and the Southeast.

Per a North American Electric Reliability Council report, plants in the Southern part of the United States suffered outages, as they weren't designed to operate at such low temperatures. Meanwhile, outages at coal-fired facilities and problems delivering natural gas to plants in the 13-state region that includes Pennsylvania and New Jersey have also affected the system adversely.

Although the storm dented electric utility services at varied parts of the nation, none of the major utilities reported any notable damages in their generation fleet or power generating system, thanks to their advanced infrastructural development. In fact, utilities in the Southeast have restored service to some customers who were hit by the storm overnight.

However natural gas pipeline constraints in the Northeast have been posing challenges to the grid operator. Currently, natural gas accounts for about one-third of U.S. power generation, roughly on par with coal. However, there is significant opposition to new pipeline construction in the densely populated Northeast, which sits just above the major natural gas-producing region in Pennsylvania, Ohio and West Virginia.

This becomes an issue during cold snaps, when residences that rely on natural gas for home heating, compete for supplies with power plants. Therefore, utility service providers in this region are expected to suffer a big blow from this storm.

3 Utilities to Watch

During the bomb cyclone, utility providers in the nation tried their best to restore the system. However, depending on the extent of the damage as well as severity of weather conditions prevalent in the outage sites, complete restoration was not possible. This may have led the below mentioned utilities to suffer in the equity market immediately following the devastating storm.

Duke Energy Corp. DUK: This company is primarily engaged in electric power production and retail distribution of power. It carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Thousands of Duke Energy customers in North and South Carolina suffered power cuts over the week (according to the utility’s online outage tracker). The company appealed to customers to lower their energy use citing extreme cold temperatures that can put pressure on their electricity system.

The company’s share price dropped 3.4% on a year-to-date basis, underperforming the broader sector’s decline of 1.4%.

Eversource Energy ES: This company transmits and delivers electricity and natural gas. It also carries a Zacks Rank #3.

High population creates problem for new pipeline construction for natural gas in New England, wherein natural gas accounted for half of the region’s electric power in 2016. National Fuel warned that it expects outages in New England that could take multiple days to restore. With Eversource being the largest energy provider in the region, the storm has affected its share price.

The company’s share price dropped 2.2% on a year-to-date basis, underperforming the broader sector’s decline of 1.4%.

Entergy Corp. ETR: This company is primarily engaged in electric power production and retail distribution of power. It carries a Zacks Rank #3.

The only nuclear plant in Massachusetts was shut because of the failure of a line that connects the reactor to the power grid. Entergy Corp, which operates the Pilgrim Station, has not yet said when the station will restart.

The company’s share price dropped 1.6% on a year-to-date basis, underperforming the broader sector’s decline of 1.4%.

To Sum Up

In general, extreme weather conditions provide an impetus to utility services demand which in turn raise utility bills. Therefore, utility providers should have gained in the United States, following the terrific snowy storm. However, the share price performance of the stocks shows a different picture.

Nevertheless, the increased utility bills that consumers have already paid, relative to the peak demand at the time of this storm, can be expected to get reflected in the improved Q1 results for these utilities as well as others. Further, once weather conditions starts to improve from the second half of January, as expected by weather reports, these utilities will be able to restore the outages full-fledged, post which their share price may take a positive rebound. In fact, each of them carrying a Zacks Rank #3 is a further indication that these stocks are worth adding in your watchlist.

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